2017 What to Do With Your £20k ISA Allowance

Many people have been asking me in recent weeks about the 2017-18 ISA allowance. It has now been raised to a whopping £20,000! Wow. That’s a helluva lot of savings to stash away over the course of a year, or all at once if you’re lucky enough to do so. Another huge change is that P2P/crowdfunding investments are now also eligible for tax-free wrapping. Sadly, the number of companies offering these ‘IF-ISAs’ are few and far between due to the extensive amount of bureaucratic hoops needing to being jumped through at present. One of the questions I received came via Huw from Financially Free By 40 who asked me which way I would lean this year as he knew of my investments in P2P since it was invented and how much of a fan I am of P2P lending.

Although I am a huge fan of P2P and of course good old value dividend stocks, I do invest in quite a variety of instruments:

stocks (the vast majority are really boring, good value companies + a very select few, more exciting growth stocks)

gilts (government bonds – can make a great emergency fund)

corporate bonds

ETFs to track commodities, property, etc.

index trackers e.g. S&P 500

P2P/Crowdfunding (I lend to small businesses)

SEIS or EIS investments

property

Now that the new ‘IF-ISA’ means we can stash £20k into P2P, this has caused me to think (I would say long and hard, but I simply haven’t had the time during the last four weeks) about how much I’d like to put into various categories. Since we haven’t had the option of P2P in an ISA until this year, my recent investments have been really heavily weighted towards stocks in our ISAs, with P2P loans contributing a much smaller amount to our annual savings – because as our wealth has increased, the necessity to avoid paying unnecessary tax has also increased.

It wasn’t always like this though. When I first started investing, I had hardly any money, but I decided to do pretty much a 50-50 split between P2P and stocks. Back then, I was just learning and doing simultaneously and made some big errors with my stockpicking. Luckily, it all worked out in the end and I somehow ended up making quite a large gain, despite losing all my money on two selections. I was naive and took too many risks without doing proper research. P2P, on the other hand, went swimmingly well. So well that I have been doing it ever since (more than a decade now!) and still like it a lot. The risks are a lot higher, although lending to a diverse choice of companies should even out any defaults or late payments. In reality, I have had one company default over the course of eleven years’ of P2P investing. That cost be a whopping £7.04 – a pittance compared to my gains of 7-15% per loan.

I must admit though, stocks excite me a lot more than P2P sometimes. Not only because I find the stock research intellectually stimulating, but also because owning shares in a good, solid, boring yet reliable dividend growth or value stock is essentially like owning a wee slice in a big company. The more you buy (and especially if you reinvest your dividends) the more of the company you own. This is quite a cool thing to think about. P2P doesn’t really give you that feeling.

However, over the last ca. 5 years, I’ve been doing P2P and a wee bit of SEIS Crowdfunding to small businesses (micro-entities in the case of SEIS) as opposed to personal loans with which I started. I really love this – the fact that you can directly lend to small businesses and help them grow gives me a tremendous sense of joy. And then I notice the returns are pretty good too! But for me, the returns almost feel like a bonus. Having worked extensively with startups and small, relatively new businesses I know their situation and how cashflow is sometimes (i.e. pretty much always) a huge pain in the ass. Imagine trying to scale up your business when your cashflow is already under severe pressure or even non-existent. Imagine trying to pay yourself a decent salary as an entrepreneur – they often go unpaid, or take a <£10k basic salary whilst starting and initially building their businesses.

Thinking about investing in P2P from this angle takes the focus away from ‘how much of a return can I get?’ to ‘who would I like to see grow their business’ or ‘which types of businesses would I love to see succeed?’. You can even choose to invest in P2P loans for a particular geographical region. I really like these aspects of P2P and the more I think about it, the more it makes me want to contribute more. The only thing I am waiting for right now is my platform of choice to give the go-ahead on their ISA and I will start investing with tax-free returns this year.

I’m only unsure of one thing – what split to do between stocks and P2P. I definitely want to continue investing in stocks, but I’m not sure how much to put into P2P. I think I’d be comfortable with up to a 50:50 split, although I probably need to think about that a bit more.

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3 Comments

I’ve never personally done P2P lending, but it is something I would definitely like to start in one day. But I also know that it doesn’t come without a degree of risk. I am interested to see what happens to a lot of these P2P loans when the market takes a downturn and loans start to become delinquent. But only time will tell with this one. It is smart to diversify our income streams and I am a big fan of dividend stocks (obviously). I would lean towards a heavy weight in stocks with some P2P on the side, but that’s just me. Looking forward to seeing what you decide!

Hey M Funny you should mention P2Ps and ISAs as I’m now in the process of moving my P2P funds into my ISAs. The exercise is merely a simplification one and wanting to take tax advantage, not because I don’t think it’s worth investing in P2Ps. I want to stick as much as possible into my ISAs and as I wasn’t planning on putting any more cash into P2Ps, I wouldn’t be getting an innovative finance ISA. I’m not cashing in/withdrawing the loans early, just taking the repayments and interest out as and when they appear in my account, so it’ll take a while for them all to wind down.

I’m unlikely to fill the whole £20k ISA allocation but I’ll want to try and chuck in as much as possible.

Hi M, very interesting. I don’t have much to say about P2P as I’ve never indulged in it, but interesting nonetheless.

I like the way you talk about the psychology of owning a slice of a company, and the reality that where you invest does actually affect the real world, such as by providing funding for start ups or reducing the cost of capital for larger companies.

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